3. Who is a “holder” of commercial paper?
A holder is one who has possession of and is entitled to enforce the instrument. So, a person who is named as payee and possesses an instrument is a holder. If the commercial paper is not payable to a particular person (i.e., it is payable to anyone in possession of the paper), anyone who has possession is a holder. An individual who is issued a note or draft is a holder. A person can also become a holder by receiving the draft through “negotiation” of the instrument. Negotiation is discussed separately.
• Note: There are certain exceptions for this rule when the instrument is forged (i.e., the signature of the payor or payee is not genuine). A forged signature does not make the instrument payable to the forger or validly make the instrument bearer paper. A thief or finder of bearer paper, however, is a holder.
• Example: Harriet writes a check to John. John is a holder of this draft. If he indorses the check and transfers it to Kyle, Kyle is the new holder. If, however, Kyle had stolen the check from John and forged John’s signature, Kyle is not a legal holder of the paper, as he is not legally entitled to enforce the instrument.
• Discussion: Why do you think the definition of a holder excludes certain individuals who do not gain possession of the paper through a legal method?
• Practice Question: Gary writes a check to Hannah. Irene steals the check from Hannah’s mailbox and endorses the check to herself. Is Hannah a holder of the draft? Why?